This is a very interesting (not enjoyable) situation. As the name suggests this occurs when the market changes and people (including first home owners) who have purchased a property using 90% plus borrowings end up oweing more than what the property is valued at in a declining market.
This article was in a magazine I was reading at Laguna Quays on the weekend. Do you know anybody who is experiencing this today.
I know quite a few people in Singapore and Hong Kong who are suffering from negative equity after their property markets collapsed.
The PPOR people aren’t too fussed. It’s their home, they made the calculations based on what they could afford so it doesn’t impact them too much.
Savvy Property investors were preparing themselves for it and either jumped or restructured their finances to not let it worry them (long term PI types).
The ones that hurt were the speculators who jumped into the market very late based on media hype and stories of a ‘friend of a friend who made millions’. These people are suffering and many have sold their places but are still making payments.
residentialwealth,
Yep- this would be happening in many places in Australia right now. Say you bought a place in docklands recently, got 105% loan to cover all costs… and your property declined 10% in value… do the maths.
This 105% loan stuff- ugh- it’s a shocker! No equity at all, and then the market changes. In a softening market, we should now be BUILDING equity, not finding ways to have 100% (or 105% debt).
residentialwealth, it’s not like the banks are going to be doing margin calls of people for the foreseeable future, but negative equity is absolutely possible. When the boom was so hot, and noone thought the bubble would burst (you’d be called a naysayer and a tyrekicker if you auggested such a thing!) notions of negative equity would only be used about Japan and other far away markets… but think about it- the decline is REAL- time to top up your equity!!
kay henry
Kay Henry…if you borrowed 90% and the thing fell 10% you would still have no equity …what is the difference…some logic applied on this forum is outstandlingly bad.
If prices are falling you can’t expect to build equity regardless of you original LTV…think long and hard about it.
Nat,
I used an example- 105% loan (which a lot of forumites seek) and a percentage of lost value- I used 10% so as to not sound like a drama queen- I could have used % drops of 20%.
If prices are falling, you can STILL build equity- just add more money to your mortgage- I don’t think that is such illegitimate logic, although you might.
I am not suggesting people should buy at peak prices anyway. If one buys well, negative equity may not be an issue. Also, not borrowing 105% will help people’s financial situation. Your property may still go down 10% but if you have equity built up or building up, you’re less likely to sink than you are to swim.
kay henry
Sorry to say it but your reply makes less sense than your original post.
This negative equity issue is going to be a bargain hunters paradise
Always looking
JeffI understand exactly what you mean Kay, I’m sure most others do.[wink]
Originally posted by kay henry:residentialwealth,
it’s not like the banks are going to be doing margin calls of people for the foreseeable future,
kay henry
Kay, firstly I agree, but I was at a lunch with a broker about 21/2 yrs agao, when the market looked like overheating, and I and others quizzed him about lenders being worried. He told us that many loans written today, have a clause that allows the lender to trigger a mortgage sale if the equity/debt ratio shifts too much.
Never thought too much about that till now.
Don’t know how common this is but am sure it is only in the fine print and many, ppl who may have such a loan would be oblivious to the risk.Terry
Quote: He told us that many loans written today, have a clause that allows the lender to trigger a mortgage sale if the equity/debt ratio shifts too much.
…absolute fiction !!
Nat,
I would like to hear you support your dramatic claim with some sound reasoning otherwise – too boring.
Tim
I think you should all wait after the 3/7 when I will be able to tell you all, how to buy properties with 55% discount all the time. In this way you will only need to borrow 55% and not 105% … Does this sound logical enough?
May God prosper you always.[biggrin]
MarcTim …where do i start?
UCCC – uniform consumer credit code…no lender can move in a sell a property whilst the borrower is still fullfilling thier obligations to pay and is not in default or arrears.
For non code loans ie investment loans…what bank in thier right mind is going to wake a sleeping dog i.e. take a performing loan and sell it up in a fire sale because the LVR has changed. They go from having an otherwise strong borrower servicing a loan to trying to force a sale. By the time they spend 3 years in court and 2 weeks on tabloid television the house would probably be worth more anyway.
Some of the absolute BS on this forum is just too funny for words.
As for loans, isn’t it true that a bank can recall a loan any time?
May God prosper you always.[biggrin]
MarcNat, you said:
“Some of the absolute BS on this forum is just too funny for words.”
If you have information that others might not be aware of, then it’s great if you share it. But you are not always “right” because sometimes it is a matter of perspective, and not *fact*. There’s ways to correct people’s misinformation without being attacking or derisive.
kay henry
Items like this are a matter of fact not opinion.
[cap]Nat, the bank will not forclose a loan as long as the person/persons keep up their repayments.
In the past when this has happened (neg equity) a persons financial performance position changed also for a merrid of reasons and that is when the banks move in – History Repeating.
If you are less than 35 yrs old the likiehood of you experiencing this in the past would be slim, heed the roar of the distant drums
[cap][cap][cap]
I am sure there are quite a few young guns on this forum that are in negative equity positions right now. Like someone said in another post, “when the guy shining your shoes claims to be an expert on the stock market it is time to run”. Maybe on this forum the slogan should read, “when the kids still at school claim to be experts on the property market it is time to run”!
Quote: “Nat, the bank will not forclose a loan as long as the person/persons keep up their repayments.?
…From memory I think that is what I said upfront.
If somebody defaults then the bank has every right to step in…that is a world away from the original incorrect suggestion that the bank can call up at tany time and force a sale.
BTW I’m over 35, I’m not in a negative equity position, I bought all my houses at the darkest hour and have done well from them.
I’m not a mortgage broker.
Quote: He told us that many loans written today, have a clause that allows the lender to trigger a mortgage sale if the equity/debt ratio shifts too much.Nat R, you said this was fiction. I for one completely refinanced my commercial portfolio late last year to provide more flexibility and to lock in some low interest rates. The bank stipulated in the loan agreement that my total borrowings could not exceed 60% of total assets.
If you get the opportinity to read a book titled “Lost Property” by Olly Newland I suggest you do.
UCCC – uniform consumer credit code…no lender can move in a sell a property whilst the borrower is still fullfilling thier obligations to pay and is not in default or arrears.I think you might find that investment and commercial finance are classed as business loans and not consumer credit. It’s a different ball game.
While I believe the banks will exercise a degree of caution regarding any foreclosure the clauses do exist solely for their protection and can be used at their discretion
Cheers
Jeff
You must be logged in to reply to this topic. If you don't have an account, you can register here.
